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This subject introduces actuarial students to stochastic asset liability modelling. It aims to expand the student's knowledge of basic actuarial principles in the fields of investments and asset management. Topics include: utility theory, stochastic dominance, measures of investment risk, portfolio theory, models of asset returns, asset liability modelling, equilibrium models, the efficient markets hypothesis, stochastic models of security prices and Brownian Motion and its application.
Intended learning outcomes
- Understand the objectives of Modern Portfolio Theory
- Define mean-variance efficiency
- Find efficient portfolios using Gaussian Elimination
- Define and apply single- and multi- factor models for investment returns
- Use expected utility theory to make investment choices
- Use and critique the Capital Asset Pricing Model
- Find portfolio expected returns using the Arbitrage Pricing theory
- Distinguish differing methodologies for making investment choices in terms of the strengths of their assumptions
- Make decisions regarding investment choice using a variety of mathematical techniques
- Discuss market efficiency and rationality
- Use stock price models across time to assess long-term risk in portfolios
- Give an actuary's viewpoint on all these topics.
High level of development: written communication; problem solving; statistical reasoning; application of theory to practice; interpretation and analysis.
Last updated: 4 December 2021